How to Trade in a Financed Vehicle

How to Trade in a Financed Vehicle

July 18, 2018    Financing & Leasing

It’s very common for drivers to trade in their financed vehicles in Canada. In fact most dealerships, Birchwood Credit Solutions included, have no problem trading in a vehicle that isn’t paid off yet. But it’s important you understand how the trade-in process works before you consider it as an option for you.

There’s a misconception when it comes to trading in vehicles that we often hear — “Once I trade in my vehicle, the loan will disappear even if I haven’t finished paying it off.” This is false and the remaining balance must always be paid off. But there are other factors to trade-ins too.

In this post, we’ll go over trading-in financed vehicles and whether it’s the right decision for you. Here’s what we’ll discuss:

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How trading-in a financed vehicle works

If you’re in the market for a new (or new-to-you) vehicle, trading-in is a great option that most dealerships offer. If you’ve paid off the entirety of your loan, you’ll have no problem getting a new vehicle. However, if you’re still making payments on your loan, there are a few more things to consider.

The first is that your loan will not disappear once you trade in your vehicle — regardless of how much money you owe. Instead what will happen is the remaining amount of your loan will be transferred to your new vehicle.

When the amount you owe on the car is less than the trade-in value, the process is pretty straightforward. Say you still owe $5,000 on a car, and a dealer offers you $6,000 for it as a trade-in. The dealer pays off the $5,000 loan for you, which releases the lien. Then, you transfer ownership of the car to the dealer.

When the amount you owe on the loan is more than the dealer is offering in trade-in value, things get a little more complicated. Lenders often refer to this as an “upside down” car loan. This sometimes happens when people buy a new vehicle without a down-payment.

Check out our blog post No Money Down Car Loans 101 for more information on the benefits of a down payment.

In this case, what usually happens is your old loan becomes part of your new loan. This is called “rolling over,” and ultimately means you’re still paying for a vehicle you no longer own. Say you owe $10,000 on a car, and the dealer offers $6,000 in trade-in. The dealer takes the remaining $4,000 and “rolls it over” into the loan on your new car.

When it’s a good idea to trade-in a financed vehicle

At Birchwood Credit Solutions, we encourage our customers to find their freedom by driving the vehicle that fits their lifestyle. If that means trading in a financed vehicle, then we’re here to support you in that journey. Here’s our top reasons why a trade-in might be a good fit for you:

  • In addition to your loan payments, your current vehicle is costing you additional money you didn’t account for. This often happens if your vehicle is a gas guzzler, requires speciality parts or additional maintenance. If you’re finding that you can’t keep up with the additional costs, look at trading it in for smaller vehicle or a model with fewer bells and whistles.
  • If the dealership is offering additional incentives. Towards the end of the year — from October through to December — dealerships are looking to make room for the new year’s models. You may find an awesome deal that makes the trade-in worth it.
  • If you’ve done your research. We always encourage our customers to do their own research into the type of vehicle their looking for before coming to the dealership. This will ensure you can afford the new payments and be happy with your new loan.


When you should wait to trade-in a financed vehicle

As nice as it is to drive a new vehicle, there’s times when trading in your financed vehicle could hurt you in the long run. Here’s a few times you should consider waiting:

  • If your current loan is still relatively new. As soon as you drive your vehicle off the lot, it depreciates in value. Rather than getting a new set of wheels right away, wait until the cost of it evens out and your loses won’t be as big a blow.
  • If you’ll suffer from a prepayment penalty. Lenders earn interest off you when you apply for a loan. If you pay it off early, you’re taking away some of their income, often resulting in you having to pay a prepayment penalty.
  • If you’ve paid off your loan and can make additional money by selling your vehicle privately. Sometimes, it’s a better option to make a little pocket cash rather than trading-in your vehicle. If you own the car and know you’ll be able to sell it for a significant amount, go that route instead.


What you’ll need for a trade-in

Logistically speaking, there are a few key things you’ll absolutely need to consider to successfully trade-in your vehicle.
These are our top 3 things to help you feel ready-to-go when you step foot into our dealership:

  1. Do your research — Remember, you’re making a “trade” so you’ll want to know as much as possible about your vehicle to ensure you’re getting the best deal. The service department will examine your vehicle before making you an off. So research as much as possible, including the make, model, condition it’s in, repairs its had, equity you owe, etc..
  2. Understand your vehicle’s equity — Be prepared to discuss your current loan and the balance owing. If you have negative equity on your payment, you’ll be expected to pay more with a higher interest rate. But as long as you understand how negative equity works, you’ll have no problem finding a trade-in that works for you.
  3. Read the contract — This is easily the most important piece of the puzzle. Ensure you know what you’re committing to before agreeing to the trade-in. There’s no harm in asking if you can take the contract home to read over in full detail. If a dealership verbally makes you an offer, always ask for it in writing.

We’ll give you all the details on three ways you can get cash for used cars and how to prepare your car for the final sale.

Check out the rest of our blog for more helpful articles covering a wide array of topics. Use Birchwood Credit Solutions car loan calculator to work out what you may be able to spend on a new car, truck or SUV, and apply for a pre-approved car loan online.

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Rebecca Lake
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